In light of a number of aggressive tactics being pursued by the federal and many state governments to challenge companies' designations of workers as "independent contractors" rather than "employees," you should ensure that you are making such designations properly. State governments have been using various methods for enforcing proper classification of workers. For example, several states (particularly New York, which has created a multi-regulatory agency joint task force) have initiated both random and targeted audits of apparent worker misclassification. We have seen unemployment insurance claims brought not only by contractors arguing that they should have been classified as employees (and are, therefore, eligible for unemployment insurance), but also by the State of New York on behalf of "all those similarly situated" to the contractor. In other words, New York employers may find themselves faced not with one unemployment insurance proceeding based on an allegedly misclassified contractor, but two – the second being brought by the New York State Department of Labor ("NYSDOL") on behalf of other workers who are allegedly "similarly situated" to the worker claiming he/she has been misclassified.
Whichever way you may be targeted, you should be aware that both the federal and state governments have been focusing on worker misclassification – many state governments have established task forces to address the issue, as noted above with respect to New York State. The federal government has also proposed several new laws and rules pertaining to this issue. Governments generally have a dual purpose: (i) to "protect" workers, and (ii) to recoup employment taxes and unemployment insurance premiums to increase government coffers.
So what should you do? As you may be aware, several legal standards and tests are used by the courts and applicable administrative bodies to determine whether a worker is actually an "employee" (and not a contractor). However, the level of control that a company has over the worker regarding the means and manner of the work, rather than just an interest in the finished product, will generally be the best predictor of whether he or she will be deemed an employee, if challenged.
- Is the worker required to work on the company's premises?
- Must the worker perform services during the company's business hours?
- Does the worker use the company's equipment and have a company e-mail address, phone extension, or business card?
- Can the term of the relationship be terminated immediately for poor performance or other reasons?
If the answers to the questions above are "yes," then the worker may be deemed an employee, if challenged. On the other hand, if many of the answers to the questions below are "yes," the worker probably has been properly classified as a contractor:
- Is the worker free to perform services for other companies during the term of the relationship with the company?
- Does he/she use his/her own equipment (laptop, computer software, tools, etc.)?
- Does the contractor work on his/her own schedule?
- Is the work performed off the company's premises?
- Does he/she advertise his/her services to others (whether on the Internet, in the phone book, or otherwise)?
Misclassification can be costly, so companies are urged to review their worker classifications at regular intervals.